IRS pays big rewards for snitching

If you knew coworkers, former bosses or exes who cheated on their taxes, would you turn them in? The Internal Revenue Service can make it worth your while.

As tax season nears, we all want to get as much money back from the IRS as possible. And while taking advantage of this year's new tax breaks will put some extra money in your pocket, snitching on a tax cheat could make you rich.

In a recent poll from the IRS Oversight Board, 13% of those surveyed think cheating is acceptable, up from 9% in 2008. As the recession puts the squeeze on household finances, the lure of fudging on a tax return is even greater.

"In a down economy, the temptation to cheat on taxes is much stronger because people are in more desperate situations more often," said Bill Raabe, a tax expert at Ohio State University's business school.

More people may be just as desperate to turn in a business, rat out an ex–spouse or report a colleague to collect a reward.

Small–time crooks: The IRS's informant program has been around for more than 140 years. If you suspect a person is committing tax fraud and report it, you could receive up to 15% of the amount that has been underpaid, with a maximum award of $10 million.

Informants are required to complete a claim, which is available on the IRS Web site, and mail it to the agency or call the IRS tip line at 1–800–829–0433. While you must reveal your identity to the IRS, your name will not be made public.

Because there is no minimum requirement for the amount in question, anyone can file a report in hopes of making an extra buck off of a cheating boyfriend or obnoxious neighbor.

"You probably get a mix of people with the informant program. You'll have spouses –– or ex–spouses probably –– as well as ex–employees turning in their employers," said Raabe. "But you really have to think, 'is it worth my time to report that guy?'"

To weed out the bogus reports from bitter ex–husbands and disgruntled employees, the IRS requires informants to fill out a detailed form and provide intimate information about the tax evader, including the person's social security number, address and date of birth.

"That's a lot of information that I'm not sure the average person has available," said Gagnon. "They're kind of asking the person to be a detective or work for them and go hunt all this information down, and I don't know how comfortable people would feel trying to do that."

Big cheaters: In 2006, the IRS really started cracking down on big time cheaters and introduced a new whistle–blower program, in which informants are paid a minimum of 15% and a maximum of 30% of the amount owed.

But there's a catch: In order to collect a reward, the taxes, penalties and interest in dispute must add up to at least $2 million. And if the suspected tax evader is an individual, his or her annual gross income must exceed $200,000.

So far, the new incentives have been effective. The IRS has received tips from about 476 informants identifying 1,246 taxpayers in fiscal year 2008, the first full year the program was implemented.

"The program is already attracting an enormous number of quality tips," said Paul Scott, a former Department of Justice trial attorney and current owner of law firm Paul D. Scott, where he represents whistle–blowers. "The volume of claims and/or tips they have been receiving with really substantial documentation or support has increased dramatically since the inception of this program."

Scott said that since the new program began, his firm has received claims from whistle–blowers involving billions of dollars in taxes, penalties and interest.

Who snitches?: In this program, the most common informants tend to be dissatisfied middle–ranking employees in big companies, said Tim Gagnon, an academic specialist of accounting at Northeastern University.

"I think it happens more in middle management than upper management," he said. "They're workers in the middle ranks who feel frustrated about what's going on and are not advancing or don't think they have a shot of moving up, because otherwise, it's hard to break loyalty."

Stephen Whitlock, director of the IRS Whistleblower Office, said that informants have had some connection to the taxpayer but they are not always close acquaintances. They have typically been employees, investors or business associates.

He also said many claims are for substantially more than the $2 million threshold and involve businesses or very wealthy individuals.

While the names of informants aren't made public, Gagnon said that a person's identity often becomes obvious based on the proof provided.

"Certain records show up and they can figure out where they're coming from," he said. "It's gotten a lot more anonymous and there's a lot more hiding in the shadows, but can you really stay in the shadows when you come forward to claim your rewards?"

Despite the program's success and generous rewards, the exhaustive information required and fear of retaliation are still huge deterrents in recruiting IRS informants.

"Once you blow the whistle on your employer, yeah, they can't fire you for retaliation, but I'm not sure how many people are going to hire you after that," said Gagnon.

But it's not always just a hefty reward that motivates people, said Scott of his whistle–blowing clients, and not all of them are jilted employees. Some feel angry about other people being above the law and getting away with it. "They want to stop the fat cats from getting rich at the taxpayer's expense," he said.

Others simply feel morally obligated to let someone know what's going on, said Scott. "They really feel like they're doing the right thing," he said. "When they look back on their lives, they will know they made the right move."